Friday, 19 April 2013

Unburnable carbon 2013: Wasted capital and stranded assets

This new research from Carbon Tracker and the Grantham Research Institute on Climate Change and the Environment at LSE calls for regulators, governments and investors to re-evaluate energy business models against carbon budgets, to prevent $6trillion carbon bubble in the next decade.Unburnable carbon 2013: Wasted capital and stranded assets (2) has revealed that fossil fuel reserves already far exceed the carbon budget to avoid global warming of 2°C, but in spite of this, spent $674billion last year to find and develop new potentially stranded assets.“Smart investors can see that investing in companies that rely solely or heavily on constantly replenishing reserves of fossil fuels is becoming a very risky decision. The report raises serious questions as to the ability of the financial system to act on industry-wide long term risk, since currently the only measure of risk is performance against industry benchmarks.” Professor Lord Stern

The carbon budget deficit

Between 60-80% of coal, oil and gas reserves of publicly listed companies are ‘unburnable’ if the world is to have a chance of not exceeding global warming of 2°C

The total coal, oil and gas reserves listed on the world’s stock exchanges equals 762GtCO2 – approximately a quarter of the world’s total reserves;

If you apply the same proportion to the global carbon budgets to have an 80% chance of limiting global warming to 2°C, their allocation of the carbon budget is between 125GtCO2 and 225GtCO2, illustrating the scale of ‘unburnable carbon’;

(click image for larger version of the diagram)

This diagram shows that even a less ambitious target of 3°C would still apply significant constraints on our use of fossil fuel reserves;

However companies in the coal, oil and gas sectors are seeking to develop further resources which could double the level of potential CO2 on the world’s stock exchanges to 1,541billion tonnes;

Stranded assets

Globally, coal reserves are centred in Pacific and Eastern regions, whilst oil is predominant in Northern and Western regions(click image for larger version of map)Even if CCS is deployed in line with an idealised scenario by 2050, this would only extend fossil fuel carbon budgets by 125GtCO2

This is equivalent to 12-14% (50-80% probability) of carbon budgets to limit global warming to 2°C and to only 4% of total global reserves;

As the idealised scenario below illustrates, CCS will only come online at scale from 2030 onwards, by which point the carbon budget may have been used up.

(click image for larger version of the diagram)

Wasted capital

Company valuation and credit ratings methodologies do not typically inform investors about their exposure to these stranded assets, despite these reserves supporting share value of $4trillion in 2012 and servicing $1.27trillion in outstanding corporate debt over the same period. We need to challenge these methodologies

To avoid systemic risks such as climate change, investors will have to demand to go beyond the traditional definition of risk as underperforming the benchmark

The rebalancing and redistribution of funds if required to protect shareholders’ interest and prevent wasted capital, the scale of which can be seen below. Greater understanding of the uncertainty and risk around fossil fuels can help the redistribution of these funds towards alternatives more attractive.

Wasted capital and stranded assets

Carbon Tracker Initiative

The Carbon Tracker initiative is the first project of Investor Watch, a non-profit company established by its directors to align the capital markets with efforts to tackle climate change. The board of Investor Watch includes Mark Campanale and Jeremy Leggett. Investor Watch was founded in 2009 (Company No. 06888857)

About Me

Robert Searle was educated in Windsor at the Royal Free, the Tutorials, and East Berkshire College. He is the originator of two major "work in progress" Paradigms known as Transfinancial Economics (TFE), and Multi-Dimensional Science (MDS).The former believes that new unearned money could be electronically created without serious inflation notably for key environmental, and
socially ethical projects. Multi-Dimensional Science though presents an unique "scientific" Methodology by which claimed psychic, and spiritual "phenomena"could possibly be "proved".
Apart from the above, Searle has proposed the development of the Universal Debating Project, an interactive "encyclopedia" of virtually "all" pro, and con arguments for practically any subject in the world.He is the creator too of a tribute blog on the musician, and broadcaster David Munrow (1942-1976), and a pioneering one on Contemporary Early Music.Furthermore, he has a very large audio-visual collection of Medieval, and Renaissance Music (manually created as Searle8), and has an "unusual" musical project involving improvisation which could also open up a "new" approach to music.